I watched an entertaining video this weekend on a simple bar room hustle (via Wise Bread). This hustle involves betting a bar patron that the distance around the mouth of beer pint glass is longer than the distance from the rim of the glass to the table even when it is propped up by several ashtrays. Any guess at how high you can prop up the glass and still win? Watch and be amazed at how bad your gut sense is.
I didn’t even come close to guessing how high those ashtrays could be stacked. Isn’t it amazing how weak our minds are at estimating measurements? That weakness can also impact our investment decisions.
How does this apply to investing? Every day as investors we look at stock financials and try to measure the potential growth of the revenues and profits of the underlying company. Then we often also try to estimate the intrinsic value of the shares. You might be tempted to guesstimate the value of a stock after reading an interesting stock idea in Barron’s or on Value Investing News. However, you should use extreme caution in relying on your gut sense when measuring value, unless you are Warren Buffett.
If our brains have trouble determining that the circumference of a typical pint glass is almost twice the length of the height of the glass, then you can see how easily our minds can fool us when trying to size up the value of a stock. There is often a lot more at risk when making an investment decision than the cost of a pint of beer, so be sure to break out your yard sticks before betting on a stock.